Owen; Secretary, Department of Family and Community Services - [2002] AATA 1202

DECISION AND REASONS FOR DECISION [2002] AATA 1202

ADMINISTRATIVE APPEALS TRIBUNAL )

) No Q2002/303-304

GENERAL ADMINISTRATIVE DIVISION       )
           Re      SECRETARY, DEPARTMENT OF FAMILY AND COMMUNITY SERVICES
  Applicant
           And    LESLIE OWEN PACITA OWEN
  Respondents

DECISION

Tribunal Senior Member KL Beddoe

Date22 November 2002
PlaceBrisbane

Decision      The decision of the Social Security Appeals Tribunal is varied as follows: Mr and Mrs Owens' entitlement to age pension and partner allowance respectively for the period 8 August 1996 to 29 June 2000 be recalculated on the basis that the loans to Owen Constructions Pty Ltd and Constellation Pty Ltd be excluded from the calculation of the value of their assets with effect from 3 March 2000.   The matters are remitted to the applicant to give effect to the Tribunal's decision.
  (Sgnd) KL Beddoe
  Senior Member
CATCHWORDS
SOCIAL SECURITY – overpayment – whether debt properly raised – whether loans made to companies are unrealizable – whether loans should be treated as assets for the purposes of the assets test
PRACTICE AND PROCEDURE – jurisdiction – SSAT remits matter to Department with directions - AAT limited in its review of the SSAT's decision to those directions

Social Security Act 1991 ss 11(12), 1122, 1129
Social Security (Administration) Act 1999 ss 179(1), 179(2)
Income Tax Assessment Act 1936 – Part IVA

REASONS FOR DECISION

22 November 2002 Senior Member KL Beddoe

The applicant department seeks review of the decision of the Social Security Appeals Tribunal ("SSAT") which decided to set aside decisions to raise and recover overpayments of benefits to the respondents.
The SSAT directed that the matters be sent to Centrelink for reconsideration in accordance with directions by the SSAT that the respondents' entitlements to benefits for the period 8 August 1996 to 29 June 2000 be recalculated without the loans by the respondents to Owen Constructions Pty Ltd and Constellation Pty Ltd being included in the calculation of the value of their assets.
Section 1122 of the Social Security Act 1991 provides that if a person lends an amount after 27 October 1986, the value of the assets of the person for the purposes of the Act includes so much of that amount as remains unpaid but does not include any amount payable by way of interest under the loan.
Section 11(12) of the Act provides that an asset is an unrealizable asset if the person cannot sell or realise the asset and the person cannot use the asset as security for borrowing.
An unrealizable asset is only excluded from calculation of the amount of assets if the provisions of section 1129 of the Act are satisfied.
Section 179(1) of the Social Security (Administration) Act 1999 provides that if a decision has been reviewed by the SSAT and the decision has been affirmed, varied, or set aside by the SSAT, then application may be made to this Tribunal for review of the decision of the SSAT.
Section 179(2) relevantly defines the decision of the SSAT for the purposes of sub-section (1) as set out in paragraph (d):-
"(d)where the SSAT sets a decision aside and sends the matter back to the Secretary for reconsideration in accordance with any direction or recommendations of the SSAT – the directions or recommendations of the SSAT."
The hearing proceeded on the basis that this Tribunal was confined to a review of the directions of the SSAT and could not therefore deal with the respondents' submissions about other aspects of the calculation of assets not relevant to the directions of the SSAT.
It was conceded for the applicant that if this Tribunal decided to set aside the directions the matters would still have to go back to the applicant for reconsideration and that it would be open to the Secretary to consider representations made by the respondents in relation to matters not relevant to the directions of the SSAT. In its statement of facts and contentions, the applicant has conceded that certain adjustments need to be made.
At the hearing Mr Kanowski represented the applicant and Mr Owen represented himself and his wife. The documents lodged in the Tribunal pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 were before the Tribunal as the "T" Documents and further documents were tendered and marked as exhibits. Oral evidence was given by Mr Owen.
Owen Constructions Pty Ltd carried on business as a builder in the Canberra region. The respondents are apparently the sole directors and shareholders, although that has not been established by evidence.
The company ceased carrying on business as a builder in 1988 because of a severe economic downturn and assets of the company were sold. The company was unable to pay its creditors and Mr Owen sold his family home to raise funds to pay the company's creditors. The consequence was that an amount of $87,127 appeared in the company's annual balance sheet as owing by the company to Mr Owen, being described as "Directors Loans". The company was not insolvent on its balance sheet because it reported an asset described as "receivables" owing by an associated company also owned and controlled by the respondents. That company, Constellation Pty Ltd, was shown as owing $104,446.
Constellation Pty Ltd was an active company carrying on business as "Skyline Buildings Canberra" and building garages and sheds. It continued to trade but incurred losses and by 30 June 1996 was having difficulty paying creditors. The respondents loaned the company $50,000 to improve its liquidity so that it could pay creditors and avoid liquidation.
In March 1997 the respondents loaned Constellation Pty Ltd a further $160,000. Those funds had been invested by the respondents through a firm of solicitors, in a first mortgage. Because Constellation Pty Ltd had accumulated taxation losses, it was determined to arrange the investment so that the company derived the investment income. The investment was treated as an asset of Constellation Pty Ltd and the amount owing to director (Mr Owen) was increased by $160,000.
That transaction had the unintended effect of making Constellation Pty Ltd more asset-rich than it had been and capable of repaying the loan to Owen Construction Pty Ltd. It is unlikely that the directors ever considered this possibility and it is more likely that they saw the arrangement as a means to avoid payment of income tax by Mr Owen, always contemplating that the amount of $160,000 could be repaid to him when the investment term expired or there was no longer any income tax advantage in directing the investment income through the company. While the alienation of income may well be capable of being set aside for income tax purposes (Part IVA – Income Tax Assessment Act 1936), the transaction must be accepted as effective for present purposes.
Mr Owen said that the loan owing by Owen Constructions Pty Ltd had been forgiven in 1991. That evidence is not substantiated by the company's balance sheet as at 30 June 1998 which still showed Directors Loans at $87,127. Mr Owens' evidence is also inconsistent with a letter by the company's accountant dated 19 October 2001 which states:
"Your loan to the company of $87,127 was also written off prior to deregistration." (T53)
Action to deregister both companies was taken in 2000. Mr Owen explained that because Owen Constructions Pty Ltd was being sued for damages arising from an accident, the company could not be liquidated or deregistered at an earlier time.
Some time after 30 June 1997 and before 30 June 1998, Owen Constructions Pty Ltd wrote off the debt of $104,446 owing by Constellation Pty Ltd. That had the effect of making Owen Constructions Pty Ltd insolvent and, on the basis of its balance sheet, unable to repay the $87,127 owing for Directors Loans.
Consideration of the balance sheets of Constellation Pty Ltd as at 30 June 1997 and 30 June 1998 indicates that the company could have repaid the loan to Owen Constructions Pty Ltd if it had chosen to do so. It is clear enough that Constellation Pty Ltd could not repay both loans which at 30 June 1997 were:-
"Directors Loan – L Owen $216,722
Loan – Owen Constructions Pty Ltd $104,445"
There was a deficiency on the balance sheet at 30 June 1997 of $112,468 mostly made up of accumulated losses. However, after making a profit for the year ended 30 June 1998 and the write-off of the loan owing to Owen Constructions Pty Ltd, the deficiency on the balance sheet had been converted to a surplus of $9,871 as at 30 June 1998. In the year ended 30 June 1999 the assets of Constellation Pty Ltd were disposed of, the company incurred a loss of $5,987 and had a deficiency in its balance sheet of $15,582 after Owen Constructions Pty Ltd had forgiven the loan.
Action to deregister the companies was initiated in March 2000 (T41) and apparently completed by June 2000 (T58).
The best evidence is the evidence as to write-off of the loans in the accounts and in the letters written by the accountants. In their letter of 19 October 2001 addressed to the first respondent, they said that the loans were written off as bad debts "prior to deregistration" (T53). The accountant's letter of 3 March 2000 forwarded the 1999 accounts, tax returns, minutes etc to the respondents for signature and voluntary deregistration of company forms to be signed. It is reasonable to infer, and I do, that the loans were written off at that time, that is, on or about 3 March 2000.
I am not satisfied that the loans ceased to exist as legal obligations prior to 3 March 2000 even though a retrospective effect was sought to be achieved in the 1999 accounts. The better view is that set out in the respondents' own documents, being the two letters written to them by their accountants who must be presumed to have been acting on the respondents' instructions. Those letters are, in my view, determinative of this issue.
The loans remained unpaid until they were written off on or about 3 March 2000. I do not accept the respondents' assertion to the contrary because I prefer the contemporaneous documented evidence of the accounts and the accountants for the correct history of the matter.
There is no issue as to financial hardship in this case.
The decision of the Social Security Appeals Tribunal will be varied so that the direction to the applicant is varied to read as follows:

Mr and Mrs Owens' entitlement to age pension and partner allowance respectively for the period 8 August 1996 to 29 June 2000 be recalculated on the basis that the loans to Owen Constructions Pty Ltd and Constellation Pty Ltd be excluded from the calculation of the value of their assets with effect from 3 March 2000.

The applicant will also need to give attention to the other matters raised by the respondents which are beyond the jurisdiction of this Tribunal.
I certify that the 27 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member KL Beddoe
Signed:         Sarah Oliver
  Associate
Date of Hearing  31 October 2002
Date of Decision  22 November 2002
For the Applicant  Mr P Kanowski, Departmental Advocate
For the Respondents               Mr Owens represented himself and his wife